the following article was published in BusinessWeek
September 28, 2009, 12:40PM EST
Autos

So far, Germany’s auto industry has escaped massive job losses, but major cuts could soon be on the cards

By Moira Herbst

The recession has caused a dent in global auto sales, but German automakers have avoided mass layoffs. In part, that’s because the German government subsidizes workers whose hours have been trimmed through a program called Kurzarbeit, or „short work.“ A successful cash-for-clunkers program, which has just finished, also sheltered the industry.

But how long before Germany’s blue-collar workers head for the unemployment lines? The signs don’t look good. If demand doesn’t return to pre-recession levels soon, many German automakers will likely begin making large layoffs. Analysts reckon up to 10% of the workforce could face the chop, while others will have to learn new skills to cope with the changes to the automotive sector. „Employment in the auto industry in Germany has peaked,“ says Ferdinand Dudenhöffer, director of the Center for Automotive Research at the University of Duisburg-Essen. „[Job losses] will come, and workers will have to find possibilities in other industries.“

The likelihood of mass layoffs could increase under Germany’s newly elected center-right government. On Sept. 27, Chancellor Angela Merkel won national elections and will now form a coalition with the pro-business Free Democratic Party, which wants to make it easier for German companies to dismiss workers. Analysts warn the auto industry could become a main target.
Changing Market

Even before the recent election, autoworker job cuts already were under way. Dudenhöffer says 2007 marked the high for auto employment in Germany, with about 750,000 jobs split between producers and suppliers. About 30,000 jobs have been lost in the past two years, and a further 70,000 could go by 2015.

„Government support will run out eventually,“ says Ian Greer, professor of economics at the University of Leeds in Britain. „Either the employer starts paying full wages at that point or, more likely without a strong recovery, there will be mass layoffs.“

Changing consumer habits underpin the pending job cuts. Michelle Krebs, senior analyst at auto Web site Edmunds.com, says German manufacturers must make the painful adjustment to making fewer expensive premium cars, which generate fat profit margins. The global recession has forced many consumers to downgrade to cheaper, more fuel-efficient, and smaller cars, which offer automakers less lucrative returns. „People want cheaper and smaller cars,“ says Krebs. „That will inevitably affect the bottom line, which speaks to job loss.“

Aware of the changing market dynamics, German union IG Metall, which represents many in the country’s auto industry, is now calling on the government to further strengthen employee rights with a campaign called Gemeinsam für ein gutes Leben, or „Together for a good life.“ The union’s plan includes creating a national minimum wage and increasing protection for older workers. The union regularly holds rallies nationwide with tens of thousands of workers to bolster popular support.
Blue-to-White-Collar Shift

Indeed, the pressures on the industry—and on its workers—are great. Many German carmakers are suffering from excess production capacity despite shrinking demand. „In three to five years, automakers will be struggling with large structural problems, primarily excess capacity,“ says Peter Kaiser, senior analyst at the economic consulting firm Prognos in Bremen.

If more manufacturing jobs head overseas, the German auto industry could shift gears to take advantage of the country’s continued strength in design and engineering. That, suggests Kaiser, could include a marketing logo of „Engineered in Germany,“ instead of the current „Made in Germany“ campaign.

The recession certainly is helping accelerate the shift in the German auto industry from blue-collar manufacturing jobs to white-collar work such as design and marketing. Yet to succeed, auto industry experts say Germany will need to turn out more highly skilled young professionals, especially engineers, and help current workers learn new skills. „The only chance for the German car manufacturing industry is to focus on [keeping] high-quality jobs,“ says Stefan Bratzel, head of the Center of Automotive Research Institute in Bergisch-Gladbach.

Of course, not all German automakers are in the same position. Volkswagen (VOWG.DE) and its subsidiary Audi are holding up remarkably well and may be better prepared for the industry’s ongoing shifts. More troubled automakers such as Daimler (DAI) and BMW (BMWG) similarly have adjusted their workforces to prepare for lower domestic demand and a global move toward smaller cars.
Expanding Abroad

Daimler’s dealings with its workforce illustrate how one German automaker is handling the changing market. The company’s goal is to maintain existing jobs in Germany while adding to overseas operations. In April 2009, management and IG Metall agreed to reduce labor costs while safeguarding employment. That included no official layoffs until mid-2010, but almost three-quarters of Daimler’s 162,800 German employees had to agree to work reduced hours.

„As a Germany-based company, the passenger car business will always have a strong production footprint in its home market,“ says Daimler spokeswoman Nicole Kicherer. „Daimler is also set for growth in emerging markets,“ she adds. Future production will focus on regional markets in Brazil, China, India, and South Africa.

Daimler also is building a plant in Hungary that will start production on the automaker’s small A-Class and B-Class cars in 2012. The project will be combined with an existing plant in Germany, which still will be the main production location for these cars as well as other compact vehicles.

Combining German facilities with plants overseas could safeguard some domestic jobs, cushioning the impact of cuts in lower-skilled production work. The Center of Automotive Research Institute’s Bratzel says lower wages in emerging countries will force German autoworkers to adapt if they want to keep their jobs. „My advice for the car industry is to focus on building innovation and quality here in Germany—creating the car of the future—even if some manufacturing functions move elsewhere,“ he says.